KIEV/MOSCOW (Reuters) - Ukrainian
President Petro Poroshenko accused Russia on Monday of "direct and
undisguised aggression" which he said had radically changed the
battlefield balance as Kiev's forces suffered a further reverse in their
war with pro-Moscow separatists.

In the latest in a string of setbacks in the past week, Ukraine's
military said it had pulled back from defending a vital airport in
the east of the country, near the city of Luhansk, where troops had
been battling a Russian tank battalion.

Poroshenko said in a speech there would be high-level personnel
changes in the Ukrainian armed forces, whose troops fled a new rebel
advance in the south which Kiev and its Western allies say has been
backed up by Russian armored columns.

Russian President Vladimir Putin, who called on Sunday for immediate
negotiations on the "statehood" of southern and eastern Ukraine,
blamed Kiev's leadership for refusing to enter into direct political
talks with the separatists.

European Union leaders decided at a summit on Saturday that the
direct engagement of Russian troops in the war - still denied by the
Kremlin - called for a stepping up of economic sanctions unless
Moscow pulled its soldiers back.

With German Chancellor Angela Merkel stressing that accepting
Russia's behavior was not an option, EU ambassadors were to start
discussing a new package of measures that could include a ban on
Europeans buying Russian government bonds, EU sources said.

Until last week Ukraine had appeared close to crushing the
four-month rebellion in the east, which erupted after a pro-Moscow
president was forced out of power by popular protests. But then the
rebels opened a new front to the south on the coast of the Sea of
Azov, pushing towards the city of Mariupol.

AGGRESSION

Poroshenko repeated Kiev's belief that Russian forces are helping
the rebels to turn the tide of the war. "Direct and undisguised
aggression has been launched against Ukraine from a neighboring
state. This has changed the situation in the zone of conflict in a
radical way," he said in his speech at a military academy in Kiev.

Defense Minister Valery Heletey added on his Facebook page that
Ukraine no longer faced a threat from separatists but outright war
with Russian troops. "Unfortunately, in such a war, the losses will
be numbered not in their hundreds, but in thousands, even tens of
thousands," he said. "We must refrain from panic and show that
Ukrainians are not about to surrender."

In the Belarussian capital, Minsk, separatists sat down for
preliminary peace talks with Ukraine, saying they would be prepared
to stay part of Ukraine if they were granted "special status",
according to Russian news agencies.

But they said one of their key conditions would be for Kiev to
immediately end its military offensive.

The separatists' demands did not appear, at first sight, to be
acceptable to Kiev since they would leave the rebels in control of
the territories of Ukraine's industrialized east and exercising a
trade policy tilted towards Russia and away from integration with
the European Union, which is Kiev's key aim.

Military spokesman Andriy Lysenko said Ukrainian forces had pulled
back from the airport near Luhansk. However, they had destroyed
seven Russian tanks and identified a major build-up of Russian
forces to the north and south of the city.

"According to our operational data, there are no fewer than four
(Russian) battalion-tactical groups in Ukraine," he told reporters,
adding that each one comprised 400 men.

Speaking during a visit to Siberia, Putin repeated his call for
talks. "The current Kiev leadership does not want to carry out a
substantive political dialogue with the east of its country," state
news agency Itar-Tass cited him as telling journalists.

Putin also said the separatists were trying to force Ukrainian
troops from their current positions where they were firing on
civilian targets. "The aim of the militia fighters is to push away
these armed forces and their artillery to not give them the
possibility to shoot on residential areas," he said.

NON-ALIGNED STATUS IN DOUBT

Kiev has clung to a non-aligned status as it tried to steer between
two dominant powers - Russia to the east and Europe to the west.
However, NATO Secretary-General Anders Fogh Rasmussen said Ukraine's
political leaders expect a new parliament to abandon this status
after an election next month in a possible prelude to an application
to join the Western alliance.

Putin made his statehood remarks two days after comparing the Kiev
government with Nazis and warning the West not to "mess with us". On
Sunday, Putin's spokesman said his call for talks on the statehood
of southern and eastern Ukraine did not mean Moscow now endorsed
rebel calls for independence for territory they have seized.

However, Merkel took a hard line, although she acknowledged the
sanctions have hurt German exporters to the Russian market.

"I
have to say there is also an impact when you are allowed to move
borders in Europe and attack other countries with your troops," she
told a news conference. "Accepting Russia's behavior is not an
option. And therefore it was necessary to prepare further
sanctions."

EU leaders asked the executive European Commission to prepare
further sanctions within a week, building on steps taken at the end
of July, which targeted the energy, banking and defense sectors.
"I'm hearing that a ban on buying Russian government bonds could be
in the next package," an EU official familiar with the preparations
said.

The July round forbade Europeans from buying or selling new bonds,
shares or other financial instruments with a maturity of more than
90 days issued by major state-owned Russian banks.

COMMON SENSE

Putin called for the EU to think twice about stepping up the
sanctions, which were first imposed after Russia's annexation of
Ukraine in March. "I hope that common sense will prevail and we will
work in a normal modern way," the Interfax news agency reported him
as saying.

He won support from China, with which Putin wants to trade more as
the West tightens its restrictions.

"A political solution is the only way out. Sanctions do not help to
solve the underlying problems in Ukraine," Chinese Foreign Ministry
spokesman Qin Gang said.

Several EU countries heavily dependent on Russian gas supplies,
including the Czech Republic, Slovakia and Austria, opposed new
measures, which require unanimous agreement.

"I consider sanctions meaningless and counterproductive," Slovak
Prime Minister Robert Fico said on Sunday. "I reserve a right to
veto sanctions harming national interests of Slovakia."

The EU could ban gas exports and limit industrial use as part of
emergency measures to protect household energy supplies this winter
as it prepares for a possible halt in Russian supplies due to the
crisis, a source told Reuters.

The United States and EU already extended sanctions after a
Malaysian airliner was shot down over rebel territory in July,
killing 298 people. Moscow has responded by banning the import of
most Western foodstuffs and shutting down McDonald's restaurants but
so far energy shipments to the EU have been unaffected.

Russian Foreign Minister Sergei Lavrov said there would be no
military intervention from Russia in Ukraine. Moscow denies the
presence of Russian tanks and troops there, despite what NATO and
Western governments have said is overwhelming evidence to the
contrary.

(Additional reporting by Richard Balmforth in Kiev, Mark Trevelyan
and Thomas Grove in Moscow, Noah Barkin in Berlin, Jan Strupczewski,
Adrian Croft and Martin Santa in Brussels and Sui-Lee Wee in
Beijing; Writing by David Stamp; Editing by Giles Elgood)